[UPDATE: Bob has updated his article. The astute reader will notice that all the mistakes I point out in this article still apply.]
He lays out a 4 step case. Since the higher the number, the more important the ideas presented, we will go right to step 4. As is the right way to have a serious discussion, I will summarize his argument to [hopefully] his satisfaction, then show where the boo-boo is. As always, quotes always get italics, I get regular font.
Step 4: Bob spelled out in earlier steps that we are talking about the following situation. There is a glut on the market of some products, call them A. The great economist J.B. Say claims to have proven that A cannot include every item produced in the economy. There will always be some products, call them B, that will have been underproduced. To get out of a depression, which is defined by Bob in this context as too much A, Say wrote that the solution is to make less A and more B, which will of course involve diverting resources from A to B.
To which Bob has this to say:
4) Gene Callahan gave a little thought experiment, that made me think in terms of present and future goods and services. (Note how “Austrian” this is…)
In other words, wait a minute. What if A is in the present and B is in the future?
We also needed to deal with the fact that leisure is a present consumption good.
in other words, what if A includes lying around doing nothing? After all, the great Austrians have emphasized that leisure is a consumer good. Rothbard even went so far as to write that the proposition that leisure is a consumer good is one of the Big Three of Austrian Economics.
In light of these subtleties, I realized that maybe it’s a bit odd to say, “No, a general glut is impossible, there can be overproduction in some lines, but only if there is underproduction in others lines,” if it so happens that all of the overproduction is concentrated in present goods (including leisure), while the underproduction is concentrated in future goods.
I mean, if A is everything made in the present, including leisure, and B is everything made in the future, that means that at present we have too much of everything.
If you think through what that would look like, why it has the same observable features as “an economic depression.”
Because what you see right now is too much of everything everywhere. You can’t see into the future, it’s invisible. In particular you can’t see today right now all those B’s that are theoretically the underproduced stuff.
I think I have summarized his position in a way that he will agree with.
Now, sadly and reluctantly, Smiling Dave will show that this impressive intellectual edifice is as full of holes as a Swiss cheese.
1. Bob’s first blunder is a misunderstanding of Say’s Law. So it’s time to explain it in simple language that anyone can understand. Bob, draw a horizontal axis. Label it t, for time. Say’s Law asserts that for any given value of T of t, there cannot be a general glut in time T. I hope we agree that if said assertion is proven, you must confess your articles to be in error. Because you think the proof of Say’s Law admits the possibility that there might be a general glut in time P, which is balanced by future production in time Q. No way, Jose.
The proof itself is trivial. Consider everything in existence in time T that has been produced but not yet been sold, call them products A, B, C etc. The fellow who made A, in a barter economy, can trade at least some of his A for some B, some C, etc. The fellow who made B, in a barter economy, can trade at least some of his B for some some A, some C etc. And guess what, they will go ahead and trade. That’s why they produced the stuff in the first place.
After the initial rounds of trading, each person will have some unsold product. For each product X, the producer will then say to himself, let me see if I can get more of what I want with my leftover X. Another round of trading will begin. And so it will continue until either everyone gets rid of everything, or some people have leftover X with nothing to left to buy with it. The ones with leftover X have what we call a particular glut at time T for products X. Had other people made some more non-X that the producer of X wants, the producer of X would have been able to trade away his X and everyone would have sold everything.
But what about a money economy? Doesn’t that complicate things? No. Assume the producer of X is willing to trade one X for two Y, and the producer of Y is willing to make the same trade. Then the prices of X and Y will settle in such a way that one X and two Y have the same price. Nothing special or complicated there.
Bottom line, this whole present goods balanced by future goods is a big boo-boo. Re-read your sources about Say’s Law, both Rothbard and Say himself, and you will see I am right.
2. Not as important a blunder, but a major one still, is misunderstanding what leisure is. When the great Austrians wrote that leisure is a consumer good, they did not mean that leisure is something people sell to other people. Nobody goes to a store and says, “I’ll have a gallon of milk, a loaf of bread, a haircut, and a bottle of leisure.” All Mises and the others meant was that in listing a person’s scale of values, first cow, second horse etc, that leisure has to be somewhere in that scale. But leisure is not something sold in the supermarket.
When people complain about general gluts, or any kind of glut, they are complaining about too much of something that is for sale. And Say’s law, too, is only talking about things that are for sale in a store. What a mistake, to introduce leisure into a discussion of Say’s Law!
The article is long already, and the major points discussed, so I’ll present the rest of Bob’s boo-boos in outline form only.
3. I wrote that no price changes of any kind, not for resources nor for wages, are needed to produce the balance of A and B [mentioned in my summary of Bob’s argument] that Say was talking about. Bob replied with a quote from Rothbard which talks about lowering prices, and he thinks that quote is talking about how to “solve” a depression.
Bob, we are talking about two different things. If you have one of those ice cube makers in your refrigerator, and it goes haywire and starts flooding the house with ice cubes, you have two problems. First, what to do with all those ice cubes. Second, and more important, how to turn that thing off and stop the endless flow of ice cubes.
Rothbard is talking about how to get rid of the ice cubes, not how to turn off the machine. Some guy has excess inventory. He thinks there is “not enough money” out there to buy it. Rothbard tells him. lower the price and you will unload your inventory.
But that does not “solve” a depression. If he keeps making ice cubes nobody wants, he will be in trouble. What he has to do is stop making them. And that can be done with no prices changing of anything, as detailed in my first article.
4. Finally, economics as a science has developed through time. In Say’s day, the ABCT was not understood. When Say wrote “too much A was made”, he could not explain why too much A was made. He just made the correct observation that it was too much A that was made, not too much of everything. He also knew what would fix the economy, namely, make less A. He did not go into detail about what market process will lead to less A being made. [Remember, we are talking about turning off the machine, not selling off the ice cubes].
As time went on, ABCT was discovered. It added to our understanding, by filling in the aforementioned blanks in Say’s understanding. We now know why too much A was made [inflation of money supply creating malinvestments] and how to fix it [do nothing].
The quote from Rothbard in Bob’s article is from a history book. It is describing Say’s thinking. That’s why it doesn’t go into the insight afforded by ABCT, because Say didn’t have it. My first article is working with the added insight ABCT gives us. So trying to say I am wrong by quoting that section of Rothbard is a boo-boo.